Essays in Bargaining and Contracts

Bargaining models of multilateral exchange have to contend with the possibility that a part of a proposed multilateral deal for a set of parties may still be a feasible and consensual deal for some of the parties. The first two chapters are based on embedding this possibility in two extensive form bargaining games for coalitional environments known in the literature. The third chapter explores in a simple credit relationship between a creditor and an entrepreneur with a sequential investment project, whether the strategy to commit not to refinance a project in the event of default of any value to the creditor. It is also concerned with the extent to which competition on the entrepreneurial side of the market and the informational environment may make such commitment sequentially rational. The final chapter studies an exchange environment with weak protection of property rights so that power is the basis of exchange. With property rights and income distribution constantly in flux, the question is whether the imperative to maintain stability can act as a constraint on classical allocative efficiency.;In Chapter 1, a new feature pertaining to proposer's ability to implement offers is introduced in the extensive form bargaining mechanism studied in Okada (1996). This mechanism is used to analyze two classes of coalitional games with transferable utility. One class is that of strictly supermodular games; the other has the property that per capita value is increasing as a coalition adds to its members. The new feature in the mechanism is that the proposer has a choice to implement his proposal with any subset of responders who have accepted it. It is shown that for all sufficiently high discount factors &dgr; , there exists an efficient subgame perfect equilibrium in pure stationary strategies (SSPE) whose limiting outcome is the core-constrained Nash Bargaining Solution. For strictly supermodular games, Core constraints are binding on Nash Bargaining Solution while for the other class they are not. Also, all efficient SSPE are payoff-equivalent in the limit as &dgr; → 1 .;In Chapter 2, a new feature pertaining to proposer's ability to implement offers is introduced in the extensive form bargaining mechanism studied in Chatterjee, Dutta, Ray and Sengupta (1996). This mechanism is used to analyze two classes of coalitional games with transferable utility. One class is that of strictly supermodular games; the other has the property that per capita value is increasing as a coalition adds to its members. The new feature in the mechanism is that the proposer has a choice to implement his proposal with any subset of responders who have accepted it. It is shown that for all sufficiently high discount factors &dgr; , there exists an efficient subgame perfect equilibrium in pure stationary strategies (SSPE) whose limiting outcome is the core-constrained Nash Bargaining Solution. For strictly supermodular games, Core constraints are binding on Nash Bargaining Solution while for the other class they are not.;In Chapter 3 which is coauthored with my advisor Kalyan Chatterjee, a simple contracting environment with a creditor who has wealth and a entrepreneur who has a two-period investment project is studied. After observing the partial completion of the project at the end of first period, the creditor may decide whether to refinance it or liquidate it. Contracting is subject to moral hazard and limited liability each period. The creditor prefers a contract that commits him not to refinance if and only if the extent of moral hazard problem is sufficiently high. Such a commitment may not be sequentially rational, however. The role of competition and hidden information in enforcing commitment is studied. When credit supply is scarce and the creditor lacks commitment, competition from other potential entrepreneurs may not be a credible deterrent against refinancing because of the wedge between the liquidation value of the output and its value as an input for second period. Sufficient conditions are developed under which hidden information makes commitment sequentially rational.;In Chapter 4, an equilibrium existence theorem is established for a stochastic game model with discounted payoffs in which at each date every player has opportunities to redefine the prevailing state. A state in the model is a property rights allocation over an asset and a distribution of income from the asset among all the players. Property rights may be held by coalitions which may differ in terms of their power and their productivity with the asset. A transition from one state to another is feasible if the proposed owning coalition is at least as powerful as the current owning coalition and everyone in the proposed owning coalition consents to the change. State transitions in the stochastic game are endogenous because they are constrained by players' threat positions which are endogenous. A stylized example illustrates that when power is the basis of exchange, stability may be a constraint on classical allocative efficiency.